The Changing Landscape in Gold and Silver

Whereas the apparent robust performance of major indices around the world suggests the world is returning to something approaching normal, what we’re really seeing is a long line of traps being set to snag a fresh round of suckers who fall for the mainstream smokescreen. With another US$1 Trillion on the way from the Fed to further devalue the dollar, and with other nations thereby comforted sufficiently to follow suit, gold and silver prices can do naught but rise.

Our chart below of the 1 year performance of the mining-dominant TSX Venture Exchange in Canada tells the tale. An increase of nearly 31% since July demonstrates the intense demand for mining stocks that is driving the index towards pre-2008 levels.

If the United States Federal Reserve is going to continue to rig the appearance of market health through what has become the annual injection of a trillion dollars' worth of growth curve, the only rational outcome to be expected is the hyperbolic explosion of precious metals prices upward in direct proportion to the diminishing dollars’ buying power downward. That is going to drive more and more investors into gold and silver exploration companies as the effect of such delusional fiscal mismanagement continues to wipe out the value of U.S. denominated savings, and retirees who thought they were set find themselves being forced to seek speculative rates of return.

Especially as risk becomes uniform across the asset classes in a volatile world where currency exchange rate instability and negative returns on government debt undermine the historic safety of blue chips and fixed income.

So, assuming that we all agree that investing in junior explorers and miners is just slightly less risky than investing in U.S. denominated triple A assets, we owe it to ourselves to stop the hand-wringing and worrying, turn off the Fox Business news and CNN, use the Wall Street Journal and New York Times for their superior functions as fire-starter and fish wrappers, and get focused on how to maximize returns and minimize risk in this red hot sector.

Among the emerging realities of a $1,300 an ounce gold price that is firmly embarked on a path beyond $1,500 near term is the fact that heretofore uneconomic ore-bodies of gold and silver have suddenly become handsomely economic. Examples abound of companies who are moving forward with deposits whose mines will ultimately realize a head grade well below one gram per tonne. And that has created extreme opportunity for investors in the sector.

Among investors comfortable in the gold and silver exploration space, the fuel that takes share prices northward has always been drill results. A drill result headline makes an instant home run in certain cases. Anything that combined a length of 100 meters or better with a grade of 5 grams per tonne or better has historically seen an immediate and generally lasting lift in the share price – especially if followed up with step-out holes of similar value.

Also historically, 100 meters or better of anything less than a gram per tonne would mostly be overlooked or received with a lukewarm bump in share price that quickly faded. And that mindset hasn’t really changed that much recently, even with gold up $300 in one year. True, the general investing public has always been slow on the uptake where fundamental shifts in any given market occur. And the explosion of ill-informed and just plain wrong-headed advice on the net thanks to social networking ubiquity has only compounded the problem by drowning out the voices of reason with the vastly more numerous voices of stupidity.

So there are future fortunes being gathered now by shrewd veterans of the precious metals investment world who fully understand and embrace these new realities of this gold and silver bull market.

Which brings us to another point that happens to mislead and delude mainstream investors who take their advice from publications with broad circulation: the whole idea that the gold price is some kind of bubble that will pop, like technology or houses or tulips, or any other commodity that can be easily grown or fabricated at will.

Gold is not consumed. For the most part, it is preserved and hoarded. It can’t be fabricated, and its extraction from the earth profitably is anything but easy. Its concentration in economic deposits is rare, and very finite. It is exactly these characteristics that make it so intrinsically valuable. Ignore those who claim it has no intrinsic value. The mere fact of its status as world monetary standard for over 5,000 years IS intrinsic value.

That is not to say that a price bubble can’t form in the market for gold. In fact, there is little doubt that the gold market will be subject to the formation of bubbles that pop and reform as the price evolves towards its ultimate high. But the pressures that form bubbles –irrational demand, the herd mentality becoming the stampede mentality, leveraged spec positions in the futures markets – have all been present in the gold market to some degree since it first charged through $300 in late 1999. So those spikes and dips in the price chart since then can arguably be classified as bubbles forming and popping.

It is interesting for gold investors that one of the results of the pro-regulation environment that always manifests after a major market contraction such as the one we affectionately refer to as the global financial crisis of 2008-09 is the enhanced scrutiny of the gold and especially (at this point) the silver markets by the CFTC, whose commissioner Bart Chilton said market players have made "repeated" and "fraudulent efforts to persuade and deviously control" silver prices.

Mr. Chilton said he believed there have been violations of CFTC rules that should be prosecuted, though he couldn't publicly disclose trader names. The lawsuits brought against J.P. Morgan (NYSE:JPM) and HSBC (HBC) shortly thereafter negated any requirement of that.

There’s still a long way to go and a track record of failure in trying to prove manipulation cases against entities such as these with bottomless legal defense pockets and no shortage of friends in high places. But the howl for blood from the mob is increasing, and so it stands to reason that J.P. Morgan, HSBC, and other perps in the scheme are going to be looking to reduce their participation, and therefore their influence, in the precious metals markets.

Absent the insidious influence of hundreds of thousands of contracts on the short side of the market, the price of gold, both current spot and for future delivery, will likely surge free of these yokes.

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